In the last two posts, I have discussed in detail the 2 most critical elements to implementation of this healthcare plan, employee–owned and funded tax-exempt HSAs and employer-owned and funded tax-exempt HRAs. The remaining three elements are 1.) a third party claims administrator, 2.) a stop-loss insurance carrier and 3.) a professionally managed investment vehicle. In this post, I will briefly outline each of these three elements and then discuss exactly how all of these elements work together to produce a new paradigm for the management of healthcare finance and an entirely new model for healthcare in the U.S.
The third party claims administrator is the company that provides the network of physicians, hospitals and other healthcare professionals used by the employer and its employees should a network be necessary. It is also the company that receives, processes and pays the claims from physicians, hospitals and other healthcare professionals. Should the free market in healthcare be restored and competition between hospitals, clinics and doctors serve to stabilize prices, networks and fee schedules will eventually become unnecessary. Until that time, however, it is likely that the stop-loss insurance carrier will require a network with fee schedules before agreeing to a contract with an employer in order for its actuaries to assess the risk to the stop-loss carrier and thus determine the rate for the insurance it offers. Since all of our healthcare insurers have such networks, almost all of the companies that currently self-fund for healthcare use one of the existing health insurers as their third party claims administrator (TPA). However, these contracts are complicated. The TPA may charge an amount per claim processed. The TPA may charge a percentage of the HRA fund plus a charge for claims processed. There may be fees for amounts the TPA saves the employer through its management of healthcare delivery. Yet other TPAs will take a percentage of the payments made to the doctors and hospitals in its network.
To make healthcare affordable, this process needs to be simplified. Since the management of healthcare delivery is being abandoned as wasteful, I am committed to the creation of a TPA that automates the claims administration process for all claims other than those flagged for fraud and abuse. The TPA will receive no share of the payments made to hospitals and doctors as doing so only serves to increase the charges submitted by doctors and hospitals. There will be no need for the TPA to charge a fee for each claim processed in an automated system freed from the labor-intensive management of the healthcare delivery model. The TPA that I am committed to creating will therefore charge a flat fee of $1,000 per employee per year and $500 per dependent per year for services provided by the TPA. This fee is paid by the employer out of the employer’s HRA.
Stop-loss insurance carriers are used by companies that self-fund healthcare to protect the company from unforeseeable catastrophic loss consequent to a major illness. These are also referred to as re-insurance companies. Typical rates for stop-loss insurance are $50 per month per employee or $150 per month per family. Policies can be written for individual loss or aggregate loss. The rates are low because they only cover catastrophic loss and statistically these carriers pay claims less than 1% of the time. Nonetheless, I consider this to be an indispensable element of this health plan as it protects the company from bankruptcy due to a catastrophic medical illness and thereby protects the company’s employees from sudden and unexpected loss of insurance coverage consequent to insolvency of the company’s HRA fund. The stop-loss insurers will only cover companies with 100 or more employees as they require sufficient numbers to mitigate risk. The stop-loss insurance coverage for the plan is an expense paid by the employer from the HRA account. One of the functions of the TPA can be to provide companies that do not already have a relationship with a stop-loss carrier with a policy from a stop-loss carrier and help negotiate the price for that insurance coverage. I will discuss the potential for arrangements to cover companies with fewer than 100 employees as well as individuals in a future blog.
The final element in this plan is the use of a professionally managed investment vehicle. Any funds in the employer’s HRA that are not needed to pay claims for the current year are available to be invested. Thus, the HRA fund will actually consist of 2 funds–an HRA claims fund and an HRA investment fund. Once the annual return from the HRA investment fund is sufficient to replace the employer’s annual healthcare contribution, the cash for the HRA claims fund will be drawn from the HRA investment fund on an annual basis. Most large companies already have fund managers for their retirement plans and would most likely choose to use the same managers for their HRA fund. However, the HRA fund cannot be commingled with the retirement fund or any other fund and all returns on investment of the HRA fund must remain in the HRA fund. Any funds withdrawn from either the HRA claims fund or the HRA investment fund for any purpose other than to pay legitimate medical expenses will incur fines, penalties and interest assessed by the IRS. Employee HSA funds are treated in a similar fashion. Funds required to pay claims from the employee HSA must remain in the employee HSA claim fund. Funds in excess of the employee’s annual HSA contribution may be transferred into the employee’s HSA investment fund. The employee has access to the employer’s fund management team but is not required to use them. Because the HSA investment fund belongs to the employee, the employee is free to choose how and where those funds are invested. But, as with the employer’s HRA investment fund, the employee HSA investment fund cannot be commingled with other investment funds and all returns on investment of HSA funds must remain in the employee HSA investment fund. For those companies requiring assistance with securing professional fund management at a competitive rate, the TPA will assist in establishing connections with those management firms and in negotiating rates for the services provided by those firms.
So now that we have all the pieces, let’s put them together to show how the process works:
Employee A with a $3,500 annual HSA contribution is hospitalized 3 months after starting this plan. The employee has consequently had $810 deposited into his HSA via pre-tax payroll deduction. Medical expenses from the hospitalization total $10,500. The hospital submits the $10,500 medical bill to the TPA and the TPA processes the claim. The charges all fall within the agreed upon fee schedule. The TPA determines that $3,500 is owed from the employee’s HSA and $7,000 is owed from the employer’s HRA. The hospital is paid $7,000 from the employer’s HRA and $810 from the employee’s HSA and the TPA notifies the hospital that, per agreement, it will receive payments of $135 every 2 weeks from the employee’s HSA until the employee’s balance has been paid.
Employee B also has a $3,500 annual HSA contribution but incurs no medical expenses in the first year of the plan. The HSA contribution the next year has been raised to $4,000. $153.85 is deposited into the employees HSA claims account via pre-tax payroll deduction over the next six weeks bringing the HSA claims fund balance to $3, 961.55. From the next paycheck, 153.85 is withdrawn pre-tax. $38.45 is deposited into the HSA claims fund bringing the balance to $4,000. $115.40 is deposited into the employees’s HSA investment fund and all further HSA contributions for the year are deposited into employee B’s HSA investment fund.